New cyclical credit product for rainfed areas on pilot basis

Published: Thursday, August 28, 2008, 17:35 [IST]

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Mumbai, Aug 28 (UNI) The Reserve Bank of India today directed all scheduled commercial banks to identify a rainfed district for introduction of a simplified cyclical credit product to farmers to finance crop production.

Under the new product, 80 per cent of the crop loan requirement of individual borrowers might be released through a short term production loan in confirmity with the present norms and practices and the remaining 20 per cent, representing the core component, sanctioned as a 'clean credit limit' to ensure year round liquidity.

The core component could be expenses for land preparation and pre-sowing operations besides self labour or consumption.

RBI said the new system may be tried out in select branches with effect from the forthcoming crop season and a confirmation sent to its Regional Office under whose jurisdiction the head office of the bank functions, giving details of districts, where the pilot scheme had been introduced.

An Internal Working Group that went into the report of the Radhakrishna expert group, which among others recommended introduction of a cyclical credit sytem to mitigate the liquidity constraints farmers in rainfed areas, had recommended the introduction of a new simplified cyclical credit product for financing crop production while also ensuring year round liquidity for farmers, particularly in rain-fed areas of the country.

RBI, in a circular to all banks, said Banks may allow drawings in this 'clean credit limit' on the pattern of operations in cash credit/over draft accounts as long as the farmers continue to service interest. Asset classification norms as applicable to non-agricultural cash credit / over draft accounts would apply to this clean credit limit.

Further, any reschedulement of the loans in terms of extant guidelines on relief measures to be provided in the event of natural calamities in these areas will warrant that balances outstanding in the clean credit account are clubbed with the outstanding in the loan account for reschedulement and a fresh 'clean credit limit' is again made available to the farmer, the circular said.

However, in the normal circumstances, the extant guidelines of borrower-wise asset classification would prevail in the case of this new product also, unless specifically dispensed with as in the case of restructuring in Natural Calamities. Rate of interest and periodicity of interest application in respect of the 'clean credit limit' would be as applicable to other agricultural advances.